FX Market Summary 04-10-2014: Dollar Undermined By Lower Yields

The dollar has remained firmly on the defensive over the past 24 hours after being undermined by Wednesday’s more dovish than expected Fed minutes. Within the minutes there were concerns that inflation would stay at levels too low to be consistent with recovery. There was also an attempt to downplay expectations of higher interest rates with unease that forecasts were too bullish.

There were no specific comments over the timing of potential rate increases following the ending of quantitative easing and no reference to the infamous ‘six month’ remark from Yellen in the press conference. There was a scaling back of market rate expectations which triggered renewed selling pressure on the dollar as EUR/USD broke above the 1.3820 area and moved to a peak above 1.3870.

China’s latest trade data was weaker than expected with a decline in annual exports for March and a sharper decline in imports which led to a monthly trade surplus. Weaker risk appetite triggered defensive yen demand with USD/JPY retreating to below 101.70.

The Australian labour-market data was stronger than expected with a sharp decline in the unemployment rate to 5.8% for March from 6.1% previously while there was also an employment increase of over 18,000 for the month. AUD/USD initially continued its strong run with a peak above 0.9450 before fading back towards 0.9400 as overbought indicators were unwound.

Euro-zone inflation data was generally weak, maintaining pressure for the ECB to take additional action, but attention was focussed more on very strong demand for Greece’s return to the bond market.

There were no surprises from the Bank of England with interest rates left on hold at 0.50% with the amount of quantitative easing also left unchanged. With no statement, the market reaction was relatively muted as GBP/USD drifted lower from one-month highs above 1.68. Short-term indicators were over-bought and there was also some speculation over a double top from a medium-term perspective.

The latest US data was stronger than expected with a decline in jobless claims to 300,000 in the latest week from a revised 332,000 previously. The dollar rallied briefly, but was unable to gain any significant traction and there was further downward pressure on US bond yields with 10-year yields below 2.70% which sapped dollar support. In this context, EUR/USD rallied back to the 1.3875 area later in the US session. USD/JPY did find support below the 101.50 level with rallied unable to make significant headway.

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